The Curious Case of the U.S. Natural Gas Storage Inventory

The U.S. Energy Information Administration’s (EIA) Weekly Storage Report and the overall natural gas storage inventory have long been drivers of NYMEX natural gas pricing in the United States. The weekly report, released at 10:30 AM ET on Thursdays, details the weekly changes to domestic natural gas storage inventory levels and tends to be followed by a quick flurry of trading activity based on how the report compares to analyst expectations. Gas is typically injected into storage during the months of April – October and withdrawn during the months of November – March.

Total inventories tend to give a more broad view of the balance between supply and demand.  In general, a larger-than-average storage inventory would suggest higher supply and/or lower demand, while a lower-than-average inventory level would suggest decreased supply and/or elevated demand.  When applying storage levels to price movement, ceteris paribus, strong inventories should pressure pricing down, while weak inventory levels would add bullish sentiment.

This leads us to the curious state of the current U.S. natural gas storage inventory level. As of October 7, there are 3,759 Bcf of natural gas in storage. Assuming another 5 weeks of injections and using current projections and average rates of injections compared to historical averages to forecast the remaining 5 injections, inventories are estimated to end the year between 3,950 Bcf and 4,000 Bcf. This would result in the second largest end-of-season inventory of all time, trailing only 2015’s total of 4,009 Bcf. What makes this curious is that the market rallied nearly $0.50 per Dth over the past several weeks despite the strong inventory level. Some analysts have even noted storage as a bullish factor for pricing.

The reason for this is not the overall storage inventory, but the amount of gas that has actually been injected this summer. Since 2006 an average of 2,180 Bcf of gas has been injected during the “summer” injection season. So far in 2016, only 1,281 Bcf has been injected into storage with an estimated 200 – 225 additional Bcf of injections left.  There was even a rare withdrawal from storage in July, the first time that gas had been withdrawn in the months of July or August since 2006.  Several factors have led to the limited amount of gas put into storage, but the main factors are inflated storage levels coming out of the winter and a pinching of the supply and demand spread.

After the historically warm 2015/2016 winter, storage levels sat at a record high of 2,468 Bcf entering injection season.  Because of vast amount of gas still in the ground injection rates were forced to slow in order to maintain system integrity on the nations’ interstate and intrastate pipelines and storage systems.  This can account for some of explanation for the lowered injection totals, but the shifting supply and demand balance can be blamed as well.  Natural gas demand during the summer of 2016 has seen growth in the power generation, LNG liquefaction and Mexican export sectors, leading to an increase in overall demand compared to 2015. Supply, on the other hand, has fallen with year-to-date production nearly 2 Bcf per day lower than its corresponding 2015 data. This narrowing of the spread between supply and demand has helped limit the amount of gas that has been injected into storage.

Although many other factors play into overall gas price outlooks, storage remains a key data point for analysts to weigh. While overall storage inventory levels are poised to enter the winter withdrawal season near record levels, the slowed injection rates throughout 2016, expected increase in withdrawals during the 2016/2017 winter heating season, and concern over falling production being able to refill storage in 2017 have helped pressure NYMEX natural gas pricing higher over the past weeks.